Joining the Dots in the supply chain

pp_1The first talk of the SustainRCA 2014/15 year, Joining the Dots, drew quite a crowd.  Held in collaboration with the People’s Parliament the event was held in a House of Commons committee room.  A fitting location as transparency, accountability and human rights are at the heart of the push to join the dots on the supply chain.  Baroness Lola Young introduced the speakers, and the evening, in the context of the Modern Slavery Bill.  The Bill, due for its second reading in the House of Lords on 17th November 2014, will compel large companies to annually disclose what they have done to ensure their supply chains are “slavery free”.  As well as regulatory pressure, customers increasingly expect businesses to delivery great products and services responsibly.  The demand for greater transparency is matched with growing interest in the narrative behind products, a desire for authenticity, the result of a centrifugal force driving remote, homogenous, global brands at one extreme, and a revival of artisan, heritage and craft at the other.

logo@2Celebrating materials, maker and method gives meaning to a product, in fact the object derives greater meaning from the sum of these stories, and here lies the rationale for Provenance, a new online retail proposition from RCA graduate Jess Baker.  Every product has a story in its supply chain, and “not all products are created equal”.  Baker felt that retail experiences where look and price are the only metrics available are missing something and she suggested customers would pay up to 70% more if they knew that the benefits were going to the local community.  Observation made, Baker, with a PhD in computer science, is optimistic that technology can help us be better citizens, redressing the informational asymmetry that currently defines the retail experience.  Provenance tells the story of the people, places, processes and materials behind products.  Oh joy to discover I live a stone’s throw away from where Prestat, chocolate purveyor to H.M. The Queen is making dark salted caramel truffles!  The Provenance  API offers makers a host of smart perks, such as the ability to serve stories on other sites, but essentially it is the products’ stories that provide the marketing clout.
The second speaker, Leah Borromeo took us to the other end of the spectrum with the trailer for her documentary, “The Cotton Film: Dirty White Gold”.  The film shines a light on the cotton industry in India, where around 300,000 cotton farmers have committed suicide to escape debt.  The political, social, cultural and economic context is such that 28.5% of the Indian population (343.5mn) are destitute and the estimated net worth of the top ten was $102.1 bn, around 5.5% of GDP in 2013.  The plight of cotton farmers is part of a web of relationships and pressures more complex than can be tackled in this film, but it poses some tough questions.
Cotton is just one commodity at the base of complex, dynamic, global supply chains increasingly under scrutiny.  Tim Wilson, Historic Futures, works with a range of multinational firms to map the value-chains (a term Wilson prefers to supply chain) from where raw materials are sourced to the retail distribution of products in a format that can be rapidly updated.  80% of social and environmental impact is in the value chain, and typically organisations have limited tools to measure this accurately.  We know deforestation, climate change and biodiversity loss are increasingly cause for concern, and that the rates of change of going up.  Yet lack of accurate, complete information undermines an organisation’s ability to make informed and reliable sourcing decisions.  Without the ability to convey their best practice to management or buyers, participants in the value chain can not differentiate themselves from less responsible competitors, and justify what may be a higher cost or investment.
We should not underestimate the complexity of these relationships.  For example, working with Marks & Spencer, Historic Futures, mapped 12.5 million items over 15 months, from more than 700 third party suppliers, and more than 6,500 retail points of sale.  It can be done with accuracy and precision.  Historic Future’s String 3 is working on a platform that is verifiable but does not reveal the suppliers, so enabling companies to share information, and preserve their competitive advantage.
Demand for this data is growing.  Earlier this year, PricewaterhouseCoopers bought Geo-Traceability, a company that uses GPS mapping, Geographic Information System (GIS) technology and mobile phone and bar coding systems to track products from origin to shop floor.   GeoTraceability has collected data from 113,000 small holder farmers in developing countries and is developing new approaches to trace conflict minerals, and monitor of key biodiversity indicators. Ian Powell, Chairman and Senior Partner, said: “Resource scarcity and supply chain management are significant issues for our clients. The acquisition of GeoTraceability is another example of how we are investing in innovative technologies and services that enable our clients to make better business decisions, establish trust and reduce their risk.”  For the smallholders the platform provides information to help improve their production, farming practices and build a more sustainable livelihood.
6114_pcThe final speaker, Bruno Pieters, designer and founder of Honest by, is striving to be the first company in the world to offer customers price transparency.  Pieters is an entrepreneur, fashion designer and art director well-known for his sharp tailoring developed while working with designers such as Martin Margiela, Thimister and Christian Lacroix.  Pieters returned from a sabbatical in India, with a deep-seated concern for the environment, and wider impact of fashion industry.  His vision brings radical transparency to the entire supply chain.  Click on an item that catches your eye and, in addition, to conventional information about the garment’s size and care, scroll down for details of the material, manufacture, carbon footprint, and price calculation: with 0.5 euros of thread, and the retail mark-up.  What a fascinating exercise!
Many of these ESG (environmental, social and governance) impacts materialise in the medium or longer term, beyond the horizons of quarterly returns or short-term profitability.  Momentum supporting a culture of long-termism, transparency and accountability in business, and the finance industry, is developing on several fronts.  Following the Kay Review of UK Equity Markets and Long–Term Decision Making, the recent establishment of the Investor Forum, is the latest in a series of initiatives that will drive demand for integrated analysis incorporating ESG factors into standard financial valuations.  These developments reflect a wider discussion about the role of business, and banks, as corporate citizens, such as the Blueprint for Better Business, Aviva’s Roadmap for sustainable capital markets and the Banking Standards Review.  In a survey of 30,000 consumers across twenty countries in five continents carried out by the UN Global Compact-Accenture Study on Sustainability, in collaboration with Havas Media, found “72% of people globally say business is failing to take care of the planet and society as a whole”.
Joining the dots on the supply chain is only the first part of a linear model of manufacture and consumption, characterised by “take, make, consume and throw away”.  Measuring and valuing resources reveals the real business benefits opportunities of using them more efficiently, and effectively.  The Disruptive Innovation Festival, was a virtual festival ideas from leading thinkers, entrepreneurs and businesses sharing knowledge about the circular economy, an economic model that is restorative by design.  Environmental scientists have long urged us to recognised that we live in a closed system or biosphere.  Mapping impacts is the beginning of better decisions, to borrow the words of Maya Angelou, “I did then what I knew how to do. Now that I know better, I do better.”
P.S. Andrew Hill will interview Honest By Founder & CEO Bruno Pieters at 12pm GMT on Day 2 of the FT Innovate 2014 conference in London, ” The Digital Big Bang, how digital technologies and practices are transforming the way companies innovate and do business.”
Related links:
 https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/253457/bis-12-1188-equity-markets-support-growth-response-to-kay-review.pdf
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Nesta’s CIO on nurturing impact investment

Nesta_Impact_Investments_WHITE_bg_RGB_v2In London’s heartland of private equity a group of finance’s bright young things gathered for a glass of wine and reflections on impact investing from Nesta’s CIO, Matt Mead, at one of a series of Happy Hours organised by Finance Matters, a community of finance professionals in London with a strong interest in helping the financial industry drive social change, and put sustainability at the heart of their careers (a version of this article was originally published in the Finance Matters Weekly).

Matt gave us a brief history of his career from chartered accountancy, by way of corporate recovery and a life time of lessons in dealing with owner-managed businesses to leading 3i‘s technology practice through the turbulence that followed the dot-com bubble. From 2007, 3i focused its business on private equity and growth capital, and, after managing the disposal of the early stage portfolio, Matt joined Nesta in 2010.
Nesta, the National Endowment for Science, Technology and the Arts, was formed in 1998 as an innovation agency.  Shortly after Matt joined, Nesta was reformed as a charitable foundation, funded by a £350mn trust and its activities include grant making (through the Innovation Lab) and the investments business.  Matt and his colleague Joe Ludlow began talking to a series of wealth managers and angel investors to better understand perceptions of social investment (now know as social impact investment) as an asset class.  When Big Society Capital (BSC) was set up in 2012, Matt and Joe saw the opportunity to combine Nesta’s expertise in grant-making and early stage investment and create Nesta Investment Management LLP (NIM is a wholly owned subsidiary of Nesta) to raise a social impact investment fund.  The fund was closed in December 2012., with £18mn: £8mn from Nesta matched by £8mn from Big Society Capital, and the Omidyar Network providing £2mn.  The fund targets ventures addressing major social needs in the UK, around three broad themes: the needs of an ageing population; the learning and employability needs of younger people; and efficient use of resources by households and communities, each of which has four impact goals attached to them.
Social investment used to mean loans to a charitable organisation, but NIM are neutral on the legal form of organisation they invest in.  Matt is clear that to broaden social impact sector, it is important to enable companies limited by shares to deliver impact.  There are constraints, for example, NIM look very closely at organisations’ object clause, dividends and remuneration policy.
Out of the roughly 600 projects that came across Matt and Joe’s desks over these years, 7 made it through to investment so far, not an unusual ratio.  These investments, currently all in companies limited by shares, are a mix of equity and debt, typically around £0.5 m ticket.
Investment decisions are impact first, and organisations must have a theory of change addressing one of NIM’s target outcomes that is clear, measurable and at the core of its business.  The investment criteria include “scalable approach; delivering impact and public benefit in the UK by providing products or services that are inclusive, accessible and affordable; with strong business models that are able to generate reasonable, sustainable returns on capital”.  One of the most talked about of NIM’s investments is in Oomph!Wellness Ltd which runs exercise classes in around 500 residential care homes.  The founder wanted to shift to a “train the trainer” model training care homes’ activities co-ordinator and providing mushome_graphicic, materials and equipment.  Oomph’s theory of change is based on exercise improving physical and mental health, reducing accident rates, and enabling care homes to provide a better quality of service addressed NIM’s ageing outcome.  Oomph and NIM worked together to develop an impact evaluation plan around targets to develop evidence proving a correlation between Oomph’s growth and the target outcome.  This is typical of NIM’s involvement, coupled with board support.
Alongside their own impact evaluation framework, NIM is keeping a close eye on measurement frameworks emerging within the industry.  The debate around measurement is lively, and far-reaching.  Calls for the adoption of standard metrics around corporate social responsibility are growing, with Mark Wilson, CEO Aviva commenting: “There is a clear need for a global mandate and a globally coordinated approach to corporate sustainability reporting, which is clearly understood and consistently applied” referring to a recent report showing that only three per cent of the world’s largest listed companies report on all basic sustainability metrics.
When talking about the differences between running an impact investment fund and a conventional venture fund, Matt candidly confessed “It is harder“.  The financial returns have to be matched with impact measurement.  The two are not always in close alignment in periods of difficult trading.  If an organisation seeks to scale back its impact, NIM, as an equity investor could be left with an equity investment that is no longer delivering on its proscribed outcome.
As always, the FM audience participants had quite a few questions, including around target financial returns. Along with a measurable impact, there is the expectation of a “reasonable, sustainable return on capital” with a net target rate and an envisaged range around it, depending on the investment and its structure.
NIM is charting new territory.  Interest in impact investing is growing in age of growing societal challenges, and government austerity.  Ronald Cohen, chair of the Social Impact Investment Taskforce, writes, “It harnesses the forces of entrepreneurship, innovation and capital and the power of markets to do good. One might with justification say that it brings the invisible heart of markets to guide their invisible hand.”
An enjoyable evening and a unique opportunity to gain invaluable insights from a pioneer of the social impact investing space in the UK.

How to Get Into Impact Investing

iiOne evening last week in the heart of the City a bunch of bright minds gathered to find out about “Impact Investing: What you need to know in 90 minutes” at an event by Finance Matters at Escape the City.  Escape the City and Finance Matters are new, fast-growing communities that inspire and connect young professionals who want to match their considerable talents to opportunities that deliver positive, social or environmental impacts. Escape the City itself helps young professionals broadly make a career change into entrepreneurial, adventure or impact-led opportunities., where as Finance Matters specialises in helping people in finance put sustainability at the heart of their career – whether that means through moving into a new role, re-designing their day job, or investing their time and capital for greater impact.

The recent report from the Social Impact Investment Taskforce, “Impact  Investment: the Invisible Heart of the Markets” defines impact investments as, “those that intentionally target specific social objectives along with a financial return and measure the achievement of both”.  While growing, impact investments are only a tiny fraction of the $210 trillion invested in global financial markets, and of the $100trillion (OECD estimate) global community of long-term asset owners (endowments, family offices, insurance companies, pension holders).  However, impact investing is gathering momentum as the public and private sector recognise that addressing key societal challenges such as environmental, life (such as health and longevity), or socio-economic risks are too large and too complex to be tackled by cash-strapped governments alone.  In 2013, several new institutional investors declared their interest in impact investments, as outlined in the J.P. Morgan/GIIN report: Spotlight on the Market: The Impact Investor Survey. 2014-10-09 12.02.49 2014-10-09 12.02.00Bon-mots from the great and the good were pasted to the walls of the stairway up to the event urging attendees to take broader look at the meaning of success.  The very embodiment of assertions that Millenials expect business to be responsible, and profitable, or perhaps the micro version of macro discussions about moving beyond GDP for better a measure of prosperity or progress.

“Doing good and doing well are no longer seen as incompatible. There is a growing desire to reconnect work with meaning and purpose, to make a difference.”  Social Impact Investment Taskforce

Brief introductions described a corps of finance professionals with some representation from business school graduates, existing impact investors and a couple from not-for-profits.  Then the speaker, Dara Nikolova kicked off with an exercise asking small groups to decide which of five case studies to invest in.  Several finance professionals immediately focused on the financial returns of the case studies.  Yet the case studies presented investments in different sectors and geographies, reflecting the more complex and nuanced equation of risk, return and intended outcome of impact investing.

Intention (to have impact) is one of the key criteria that the  Global Impact Investment Network uses to define impact investing. Impact investing also has to deliver a financial return on capital, and measurable impact – but it can be executed across a range of asset classes and with a range of return expectations.

Screen shot 2014-10-12 at 5.01.33 PMThe relative balance of these characteristics determines an invest’s location on the continuum shown right (courtesy of Finance Matters, adapted from Bridges Ventures).  There is a spectrum of investment strategies that stretches from purely financial to pure philanthropy, defined by the investor’s relative emphasis on social & environmental factors, intention to have impact, and willingness to sacrifice financial returns relative to risk.

Discussion on which would be the best investment of the case studies, was lively, if inconclusive, and a wonderful introduction to the complexity of impact investing. Dara went on to explore each of GIIN’s principal characteristics.  Madeleine Evans, co-Founder of Finance Matters, then described how approaches to due diligence, investment structure, and portfolio management approach may differ for impact investors.  One area of particular emphasis for impact investors is the link between revenue drivers and intended outcome in an proposed business model, that is to say whether the company’s target market, cost structure, and operating environment are likely to reward the enterprise for delivering on its intended impact.  For The Gym Group, one of the case studies, some argued that target outcome and revenues are aligned, as the more members and gym correlates with greater EBITDA.  Those less keen on the Gym Group’s candidature argued that although footfall would be growing is this an adequate measure of wider positive social impact?  How do we know that users are not swapping from other facilities on the basis of price?  Does it matter?

Measurement is at the heart of impact investing.  Balanced Scorecard; Impact Return on Investment; Theory of Change and Logic Model represent some of the most widely recognised tools used by impact investors and social entrepreneurs to structure and track their activities and inputs in order to most efficiently deliver on their target outcomes. Lack of transparency and credible metrics has been a break on the growth of the impact investment industry.  Currently, there are a range of impact accounting systems: Global Reporting Initiative, Sustainability Accounting Standards Board, GIIN’s Impact Reporting and Investment Standards and Global Impact Investing Ratings System, so we are some way away from being able to present standardised measurement of social impact alongside financial performance data.  As well as asking what we can measure, there are questions of whether measurement skews priorities.

The impact investment landscape is complex, fast-changing and set to grow.  It is an industry offering opportunities that more than match the ambition of the bright minds that want to Escape the City!  Dara Nikolova’s talk set out some first steps for enlightened finance professionals to follow.  The full slide deck is available on SlideShare.

There was a real buzz in the air afterwards as attendees talked animatedly about the content, before heading for a drink to ruminate further.  A throughly stimulating evening in the heart of the City.  If I have whet your appetite, both Escape the City & Finance Matters have a series of interesting events coming up, and on Wednesday 22nd October, Finance Hub from Guardian Sustainable Business will be hosting a live chat, “How to invest in social and environmental change”.

P.S. The Eden Project, the award-winning visitor attraction with internationally recognised biomes. has just broken the record for the quickest Crowdcube Mini-Bond, raising a total of £1.5 million in less than 24 hours from 355 people to develop a new space for its educational programme and give young people their first taste of horticulture.  There is certainly an appetite for impact investment!

Closing the loop and investing for the future

abundance1The rainy Bank Holiday was an opportunity to embark on some financial housekeeping, ISAs, company pension plans, children’s trust funds.  All the details in a blur of paper, opaque usernames and complex passwords.  For many years I have taken an interest in where my savings and pension are invested, though the available information is often limited. It takes patience and tenacity to reveal which actual companies underlie the many branded wrappers of the funds.  But, I am not alone in wanting to do so.
According to a survey published in July 2014 by the National Association of Pension Funds, which represents workplace pension schemes, there is a latent interest amongst pension scheme members to know where their savings are invested.  Of the 1064 respondents, 63% said they were interested in knowing where their savings were invested, including the types of companies, sectors and countries.  A large proportion of respondents (70%) felt it important for pension providers to invest in companies that avoid unethical practices, such as poor working conditions.  When presented with a choice, nearly half (49%) of respondents would prefer their employer chose a provider who invests ‘ethically’ despite this fund likely achieving a lower return on investments and being more volatile.  Interest was particularly high amongst those with a personal income over £50k p.a. (82%) and those aged 18-34 (74%).  Other recent surveys show similar findings with a survey conducted for Abundance, finding 71% of people wanted to know where their money is being invested, and 75% of people would be unhappy knowing that their money is invested in companies that damage the environment or are unethical. Similiarly research by the Defined Contribution Investment Forum  found 77% of respondents preferred a social investment fund over a conventional fund.  When respondents were told that they would receive an 8% smaller pot at retirement, 44% still preferred the social investment fund.
Activities such as the Green Light campaign, organised by ShareAction and Christian Aid, and Push Your Parents are further raising awareness of the £3 trillion currently invested in UK pension funds, and the powerful role this confers on investors as stakeholders.  With the introduction of auto-enrolment, there will be 6-9 million more savers in the UK’s private pensions system, and the appetite for greater transparency and choice is only likely to grow.  It is not just individuals whose interest has been piqued.  There are many trusts, foundations and other institutions with significant endowments that are reappraising their portfolios in line with responsible or impact investment strategies.  Widespread media coverage of the BBC Panorama investigation that found millions of pounds donated to Comic Relief  had been indirectly invested in tobacco, alcohol and arms, and more recently the Church of England’s indirect investment in pay-day loan provider Wonga highlight the associated reputation risks of not auditing investments.
Prudent investment selection can also provide further support for an organisation’s strategic aims, hence the phrase impact investment.  A number of large educational endowments have committed to fossil fuel divestment in the US.  Stanford University’s $18.7bn endowment fund is divesting from all publicly listed companies that focus on coal mining for energy generation by September.  Dayton University and San Francisco State University have also begun divesting from fossil fuels.  In the UK, University of Oxford is consulting on fossil fuel divestment, and in June the British Medical Association voted to end its investments in fossil fuels and focus on energy companies providing renewable energy.  Pensions, trusts and endowment funds by their nature have longer, often intergenerational, time horizons and duties of stewardship.  The beneficiaries of these funds have every incentive to support industries that combat climate change and support sustainability as they will be exposed to the risks of not having done so.
However, the decision to align investments with values can be difficult to implement.  ShareAction, a charity that promotes responsible investment, published a ranking of 20 of the UK’s biggest ethical funds providers, Ethically Engaged? in December 2012.  Nearly half of the providers surveyed do not publish the fund’s full holdings.  The survey scored providers on transparency, screening processes, and stewardship and ethical engagement.  Five providers (Co-Operative Investments (now part of Royal London), F&C Investments, Jupiter Asset Management, Standard Life, and WHEB Asset Management) were reported as demonstrating a strong commitment to ethical engagement with robust internal processes to ensure they respond and engage with current ethical concerns.  While some providers have moved beyond simplistic ‘screening’ approaches, traditional screening tends to be focused on excluding ‘sin stocks’ such as alcohol, gambling, tobacco and weapons whereas human rights and environmental concerns are generally higher priorities for people.  For example, 63% of providers surveyed by ShareAction screen out alcohol, and only 11% screen for child labour. The EIRIS guide gives an overview of funds’ policies on particular issues.
The most recent UN Global Compact- Accenture CEO Study on Sustainability  found that two-thirds of the 1,000 CEOs surveyed think business is not doing enough to address sustainability challenges.  Writing in the RSA Journal, Peter Lacy, Director of Strategy and Sustainability Services for Accenture and CEO Study Lead, cited investor resistance, as well as consumer apathy and regulatory uncertainty, as slowing progress.  In the 2013 survey, just 12% of CEOs regarded investor pressure as a major motivator on sustainability, as one respondent put it, “We still find it challenging to convey to mainstream investors why and how sustainability can drive value creation, but they’re starting to appreciate the risks of working in an unsustainable system.”  Speaking at the RSA in June, Lacy said investors say they are interested in sustainability but, “are unable or unwilling to factor performance into assessment and valuation”.  There is a gap an information gap.
7Since the Principles for Responsible Investment (PRI) initiative, supported by UN, was launched in 2006 with 20 institutional investors representing $2tn assets under management (AUM), it has grown to 1,260 signatories representing $45tn in AUM.  A PRI equity ownership study found that PRI signatories hold, on average, nearly half of all the shares held by asset managers,
in a sample of 379 listed companies with a combined market capitalisation of $19tn.  The challenge is to effectively convert sizeable ownership into collective influence in favour of responsible business practices and long-term strategies.  PRI’s collaborative platform, the Clearinghouse, is one example of a digital platform providing a forum for collective action.  The Clearinghouse is a private forum for PRI signatories, but one of this year’s SustainRCA finalists developed a digital app to help consumers to make informed choices that reflect their concerns. Marion Ferrec and Kate Wakely’s Disclosed, developed in partnership with a supermarket retailer, captures and displays information such as whether the product was organic, fair-trade, non-GM or low in salt, for example.  Disclosed empowers consumers to vote with their money, aligning their purchases with their values.
In the UK, as automatic enrolment brings millions of new savers into workplace pension schemes,  surely the technologies are available to us to provide greater transparency and choice so that savers, and investors can align their investment preferences and best serve their long-term interests.  A richer information set which enables investors to support transformational companies, that are driving value creation through innovative responses to global challenges, would close the loop of market capitalism and allocate increasingly scarce resources more efficiently.
Related links: